South Africa: ZAR ignores domestic political instability for now - Danske Bank

Analysts from Danske Bank, think that the Shout African Rand (ZAR) may weaken slightly against the USD, despite the resilience that showed lately. 

Key Quotes: 

“The South African (SA) economy fell back into recession in Q1 after seeing a modest recovery in economic activity in 2016. The service sectors primarily witnessed negative growth but also the manufacturing sector was hit. The indicators for Q2 point to subdued growth due to modest private consumption and investment. However, leading indicators turned downward in March. We lower our economic forecast for 2017 by a sizable margin, projecting real GDP to grow by 0.5 % (previously 0.9 % and compared to consensus of 0.8%) and only 1.3% in 2018 (previously 1.9%).”

“There continue to be doubts about the political future of President Jacob Zuma amid poor economic recovery and corruption allegations, notably in relation to the Gupta family’s influence. Unlike before, president Zuma faces growing criticism within the ANC (African National Congress) party, with key allies calling for him to step down. However, so far Zuma has survived no-confidence votes.”

“We think the political situation will continue to be fragile until the ANC conference in end-2017.”

“We think that the SARB will remain cautious on monetary policy loosening especially in but that inflation may continue to fall amid lower oil prices and weak economic activity. Hence, we continue to expect the SARB to lower rates at the September meeting.”

“The ZAR has continued its strong run despite the political uncertainty and domestic economic weakness. The strength has, in our view, much to do with the positive global risk sentiment that has prevailed over the past months. We clearly underestimated these forces in our forecast for USD/ZAR at 14 at end-June.However, we think ZAR may weaken slightly against the USD: (1) political uncertainty and inaction are likely to remain high over the next six months as Zuma clings to power, (2) the economy is likely to suffer from weak sentiment but also from (3) weakening global demand, notably from China, hurting commodity prices and global risk sentiment. However, the sharp improvement in external balances suggests that the ZAR is still slightly undervalued.”

“We expect a weakening of the ZAR from here, targeting a USD/ZAR rate of 13.3 in 3M, 13.5 in 6M and 13.7 in 12M.”